Fair Value Measurement

Question 1

What is the accounting standard for Fair Value Measurement?

Answer 1

IFRS 13

Question 2

What is the definition of fair value as per the accounting standard?

Answer 2

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Question 3

How is the fair value for non financial assets ascertained?

Answer 3

Highest and best use

Question 4

What two markets must be considered when valuing inventories?

Answer 4

• the principal market

- the most advantageous market

Question 5

What are the levels of the fair value hierarchy?

Answer 5

Level 1 - quoted prices
Level 2 - adjusted quoted price
(observable inputs)
Level 3 - unobservable inputs based on best information available (unobservable inputs)

Question 6

Which costs are included or excluded in the exit price?

Answer 6

• does not include transaction costs

- includes transportation costs if appropriate

Question 7

Which three uses should an entity consider?

Answer 7

• Physically possible
• Legally permissible (planning permission does not make it not permissible)
• Financially feasible

Question 8

Explain Level 1 in the Fair Value Hierarchy

Answer 8

Inputs are adjusted quoted prices in active markets. This provides the most reliable evidence of fair value

Question 9

Explain Level 2 in the Fair Value Hierarchy

Answer 9

Inputs are inputs other than quoted prices in level 1 are observable for that asset or liability

Question 10

Explain Level 3 in the Fair Value Hierarchy

Answer 10

Inputs are unobservable inputs, based on the best information available

E.g debt

Question 11

Give three examples of non financial assets

Answer 11

• PPE
• Intangibles
• Investment Property

Question 12

Explain the principal market

Answer 12

Use in the first instance.

It is the market with the greatest volume of sales is (regardless of whether the company currently participates)

Question 13

Explain the principal market

Answer 13

Use in the first instance.

It is the market with the greatest volume of sales is (regardless of whether the company currently participates) NOT NECESSARILY HIGHEST PRICE

Question 14

Explain the most advantageous market

Answer 14

The highest price (after all costs)

In absence in the principal market.

Question 15

In what order do you pick the market and price?

Answer 15

You pick the price AFTER market

Question 16

What costs are ignored?

Answer 16

Transaction costs

Question 17

What is fair value focussed on?

Answer 17

Assumptions of the market place and is not entity specific. It takes into account any amount assumptions of Risk.

Question 18

What does fair value take into account?

Answer 18

Conditions and location of asset and restrictions on sale or use

Question 19

Does the entity have to be transacting in a market to use the fair value?

Answer 19

No

Question 20

Give n example of when you would use Level 3 Hierarchy

Answer 20

When the open market value is available and so the discounted cashflow is acceptable

Question 21

With a farmer, would you include or exclude the notional rent and why?

Answer 21

Include as it is comparable to farmers who rent land.

Question 22

What does fair value specifically exclude?

Answer 22

IFRS 2 share based payments

Question 23

What does a fair value measurement of a non-financial asset take into account?

Answer 23

A market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant who would use the asset in its highest and best use

Question 24

How will the maximum value of a non financial asset arise?

Answer 24

From its use in combination with assets or by itself

Question 25

What is an example of if land was legally prohibited?

Answer 25

Land is protected in some way by law and a change or law is required

Question 26

When assessing if something is legally permissible, what would market participants take into account?

Answer 26

Probability, extent and timing

Question 27

What is the presumed highest and best use of an asset?

Answer 27

Its current use

Question 28

What should be considered when concluding an asset’s highest and best use?

Answer 28

Alternative scenarios where market participants may use the asset differently